Essays on inflation dynamics and monetary policy

Abstract

This thesis consists of three essays that analyze the role of sectoral heterogeneity on inflation dynamics and optimal monetary policy. In the first chapter, I consider a framework where firms are connected through input-output linkages. Inflation dynamics depend on the importance of the production network to the overall economy and on the importance of particular sectors within the network. Calibrating the model to data from the United States, I document how changes to the U.S. production network can explain why the sensitivity of inflation to economic activity has declined in the past 50 years. In chapter 2, we explore the implications of market power for inflation and monetary policy. We document how the whole distribution of markups as well as the correlation between market power and price rigidity matter for the effectiveness of monetary policy and the optimal design of monetary policy. Chapter 3 provides an empirical investigation of the relative forecasting performance of core inflation for predicting underlying inflation. My results indicate that the forecast accuracy of different measures of core inflation is time-varying and that there is a trade-off in the exclusion of items between reducing noise and removing signals.